Vandenheuvel: Time to act on California federal order

By now, most of you have probably heard that there were serious efforts by the California Department of Food and Agriculture (CDFA) and members of the California Legislature to craft a California bill that would make changes to the way we regulate our Class 4a/4b milk (which is milk sold to California’s cheese, whey, butter and nonfat dry milk manufacturers). At the end of the day, while a bill was introduced in the California State Senate, it was never considered or voted on, and CDFA announced this week that they were ceasing their efforts to promote it.

Before getting into the details of the proposal, what it might have meant to the industry, and where we go from here, it’s important to briefly go over some of the recent history that led to these developments.

Our biggest issues started in 2007, when then-Secretary A.G. Kawamura modified our Class 4b formula and opened the door to huge potential differences between California’s Class 4b price and the Federal Order Class III price (the benchmark price for milk sold to cheese manufacturers around the country). While we could get into the specific change that was made (which many folks are already well versed in, the “whey factor”), the practical impact was that the gap between our Class 4b price and the Federal Order Class III price, which had been relatively steady for many years at an average of $0.45-$0.55 per cwt, was now able to be significantly higher. And as we in this chart here, that’s exactly what happened, starting in 2010 and continuing to this day.

Over the course of the next five years, producers and their organizations/cooperatives tried many different efforts to bring that gap back to the previous levels. Those included numerous hearing requests, legal action, protests/rallies, and an attempt at legislation in 2013 (and of course, a monthly accounting of the real-dollar impacts of the state-sponsored discount in this newsletter, just in case folks had forgotten). None of those efforts brought any meaningful results, as the average gap in 2014 has been $2.18/cwt.

All told, since 2010, the discount has equated to a real-dollar impact of more than $1.4 billion, or more than $830,000 for an average 1,000-cow dairy.

While all those other attempts at restoring a fair California milk price were unsuccessful, there have been two remaining efforts ongoing. Within CDFA, a “Dairy Future Task Force” was established by Secretary Karen Ross, made up of a hand-picked group of producers, processors and cooperative staff, with hopes of finding some sort of middle ground on either short- or long-term changes to the California pricing system. At the same time, the three major California cooperatives (California Dairies Inc., Dairy Farmers of America and Land O’Lakes) began working collaboratively in 2012 towards exploring a potential Federal Milk Marketing Order (FMMO) in California.

Both of these efforts have their own unique challenges. In the case of the Task Force, it’s been seemingly impossible to find common ground between producers and the cheese manufacturers. Most of that can be attributed to the fact that while producers desperately need change, the processors do not. Change inevitably would mean higher prices paid for the milk they purchase; processors are no more excited about that as a dairy farmer would be about higher feed costs.

On the Federal Order effort, the primary challenge is the amount of time needed to go through that process. Best estimates indicate that a California Federal Order could be implemented within about two years of whenever a petition is submitted, assuming everything runs smoothly. While the three cooperatives have had staff working on putting that petition together, the final product has not yet been drafted, so that two-year timer hasn’t started yet. Further, that process is entirely in the hands of the three cooperatives. Due to bloc voting, those three organizations can vote on behalf of roughly 80% of the milk in the state. So there’s really nothing anyone else can do to speed up or assist in that process.

So if I had written this article several months ago, my status report would be that the Task Force is having discussions but moving nowhere, and the work towards a California Federal Order is occurring, but there’s nothing to publicly report on. That began to change several months ago, when some concepts were presented to the Task Force that garnered interest from both producers and processors in the room. A working group that included producers, processors and cooperative staff presented some options for reforms that had potential for getting producer and processor support. The main idea was to allow some flexibility in how that milk is contracted – changes that were very similar to the way most Federal Orders around the country already operate – and in return, the California Class 4a and 4b prices would be indexed to the Federal Order price. There were details that were left vague in the original concept, but the point was that there appeared to be an opening where both producers and processors could see value in a proposal – some flexibility in the system for processors, and a higher regulated milk price for producers.

After some back and forth between producers and processors at the subsequent Task Force meetings, Secretary Ross felt that this concept could have some merit as a legislative proposal, so she tasked her staff with exploring the option with the various industry groups.

Now there are many details we could get into here, but the bottom line is that CDFA proposed a bill that did a couple of things:

• Directly index our Class 4a/4b prices to the Federal Order Class IV/III prices, respectively. Starting next July, the bill would have set our Class 4b price at $1.00 below the FMMO Class III price (remember, it’s averaged $2.18/cwt below so far this year). The following year, it would have set the Class 4b price at $0.50/cwt below the FMMO Class III price. The Class 4a would be on a different index initially, as it already maintains a closer relationship to the FMMO Class IV price, but at no point going forward would it be more than $0.50 below the FMMO Class IV price.

• Modify our system to only apply minimum pricing rules to Class 4a/4b milk that chooses to be part of the California pooling program, the same type of system that exists in Federal Orders throughout the country. Cooperatives would make that pooling decision on milk they purchase and sell, just like in the Federal Orders, and a pooling hearing would be held next year to determine the rules on how much milk a plant can move into or out of the pool at any given time (just as the hearing process would do in a Federal Order context).

• None of these changes would apply to Class 1, 2 or 3, and the quota program would remain intact.

This presented an interesting choice for producers and their organizations. On the one hand, our dairy farmers absolutely deserve a chance to operate on an even playing field with our out-of-state colleagues in Federal Order areas. This proposal did not get us a system with regulated prices equal to the Federal Order, albeit a lot closer than they currently are. On the other hand, the proposed bill presented an opportunity to start closing the gap next year, providing near-term price relief that the lengthy Federal Order process is simply unable to provide, and there was nothing about this plan that would prevent a Federal Order from still being considered by the California producers.

On balance, while it was a difficult issue to tackle, the MPC Board voted to support the proposal and work with fellow producer organizations and cooperatives to see if there was a way to make it a reality. As an organization whose sole mission is to promote the interests of dairy farmers, we owed it to our members to see if this opportunity could lead to near-term price relief. The California discount on Class 4b milk of $2.18/cwt this year equates to about $30 million per month. Absent something happening to change that, the discount will continue month-after-month.

In the end, the three major California cooperatives were not comfortable with the reforms being presented in the CDFA bill. There was no attempt to amend the proposed, but rather a firm opposition, which effectively ended the effort this week.

While the MPC Board was willing to engage in the discussions with CDFA over near-term price relief, we would fully agree with the notion that California dairy producers deserve a chance to operate on an equal playing field with our fellow out-of-state dairy farmers. We are hopeful that out of these recent discussions, the effort to move forward a Federal Order is reinvigorated. The three cooperatives made a bold statement by their actions. Their message was clear: they’re not interested in patching up the State’s current system, the Federal Order is where they want to focus their efforts. It’s time for California’s producers to get on the same playing field as their out-of-state colleagues, and the three California cooperatives alone hold the keys to that solution. The time to act is now.